Jakarta, IO – The government has a growth target of at least 5.2 percent in 2024, based on the assumption that our Rupiah will exchange at Rp15,000 per US dollar, and we will face an inflation rate of 2.8 percent YoY. Achieving this target is not going to be easy, given the domestic economy situation, where the purchasing power is under pressure and loans are only growing moderately, plus the global economy is expected to weaken further next year.
Indonesia’s post-pandemic economic performance has tended to slow down, from 5.32 percent YoY in 2022 to 5.05 percent cumulatively by Q3-2023, meaning it is still below the 5.3 percent growth target based on the 2023 State Budget (APBN) macro-assumptions.
Domestic economy in decline
The signs of a sluggish domestic economy were visible when the Q3 only yielded 4.94 percent YoY growth, down from 5 percent in Q1 and 5.17 percent in Q2. The Q3 rate was the slowest in two years. This certainly rang the alarm bell and called for mitigations measures to ensure that the economic growth remains on track, at least in line with the APBN-recommended target.
Household consumption, the main backbone of the country’s engine of growth, grew 5.22 percent in Q2m, down slightly to 5.06 percent in Q3. Even though it is still above 5 percent, the decline hinted at a weakened purchasing power caused by food inflation in Q3.
Q3 growth was also buttressed by accelerating investment growth, where Gross Fixed Capital Formation (GFCF) grew by 5.77 percent YoY, up from 2.11 percent in Q1 and 4.63 percent in Q2. Unfortunately, exports in the quarter contracted by 4.26 percent YoY, after shrinking 2.97 percent in Q2. This was a sharp reversal from Q1, which recorded a respectable 11.94 percent growth. This clearly illustrates the adverse impact of the global economic slowdown in Q2 and Q3.
One area of weakness that caused the domestic economy to slow in 2023 was the government spending component, which shrank 3.76 percent YoY in Q3, after growing 3.34 percent in Q1 and 10.57 percent in Q2. As of December 21, government spending only reached 88.3 percent of the total budget ceiling of Rp3,061.2 trillion, meaning there is still Rp366.3 trillion that should be optimized to spur economic growth.
Sector-wise, Q3 growth was driven largely by the transportation and warehousing sector, followed by accommodation and food services, which grew by 14.74 percent and 10.9 percent YoY, respectively. Other main sectors, such as mining and quarrying, and manufacturing and industrial processing respectively grew by 6.95 percent, 6.35 percent and 5.2 percent. Meanwhile, wholesale and retail trade grew by 5.08 percent, down from 5.25 percent in the previous quarter. Likewise, the performance of the agriculture, forestry and fisheries sector also dropped to 1.42 percent, from 2.02 percent in Q2.
These results show that achieving the GDP growth targets in 2023 and 2024 will be tough. Meanwhile, Indonesia needs to grow consistently, at an average of 6 percent annually, to become a developed country by 2045. This is where the gap lies. It seems that the commendation from the international financial institutions for Indonesia’s economic resilience amid a global downturn is no guarantee that Indonesia can escape the middle-income trap. Therefore, the Government must not be complacent with the current growth rate.
Challenges ahead for the global economy
Other than domestic challenges, global dynamics also influence the achievement of Indonesia’s economic performance, because Indonesia embraces economic openness, although at a more moderate level compared to several of its neighbors in Asean. According to the Economic Freedom of the World report released by the Fraser Institute in 2023, Indonesia placed 74th, while Thailand and Malaysia were ranked 64th and 56th out of 165 countries surveyed.
Indonesia’s integration into the world economy means that global economic challenges will inevitably impact its economic growth targets. In general, the global economy in 2023 is riven with uncertainty. The IMF in October projected that the global economy would only grow 3 percent, down from 3.5 percent in 2022. Meanwhile, the World Bank and the United Nations Conference on Trade and Development (UNCTAD) forecast lower growth, at 2.1 percent and 2.7 percent, respectively. For next year, the IMF predicted a further decline to 2.9 percent. Thus, it can be said that the post-pandemic global economic recovery is stalling. (FIGURE-1)
Globally, there has been a shift in economic growth, previously centered on China to the US. The latter’s robust economic growth is supported by rising wages, which subsequently drive consumption and savings after the pandemic. Meanwhile, in China, economic growth is not as high as expected, especially after the zero-covid policy was lifted by the end of 2022. Slowing growth in China can be seen from the decline in consumption and investment due to the property crisis, sparked by the Evergrande Group, China’s second-largest real estate developer. Economic growth in Europe is also looking at a slowdown, amidst declining purchasing power, due to persistently high inflation and the impact of geopolitical tensions.